Topic: BitCoin Bank - page 2. (Read 10024 times)

Hi deti, yes it's impossible to regulate banks so it will effectively be a "free banking" system, banks can suffer a bank run or even, if they are as bad as you suggest, effectively disappear. Presumably some of them will be real legal organisations with a contract where they provide you with some USD instead if they run out of BTC or even lose them as you suggest. Also I hope no one bank would be as big as all that, it would be quite scary.

My concern is more how will you assure the money the bank holds?

Lets say a bank has 1.000.000 BTC from his account holders and then all wallets are destroyed by a software fault, corruption, virus or even a Solar Storm that destroys the bank-wallet. How do you want to manage the insurance?
1.000.000 out of the total 21.000.000 BTC ever created is equal in value to
  952.380 out of the left 20.000.000 BTC.
So the bank needs this amount of BTC to pay the account holder for the lost BTC. How will the bank pay the insurance premium for this huge insurance sum? Who will be the insurer?
The bank may not loose this amount, but if a normal bank burns, the paper money can be printed again for a much smaller fee - not so the BTC.

How do you want to manage this?

And even worse, very often the 10% which is supposedly "real assets" can often consist of very shaky assets - the kind of mish-mash securitized sub-prime mortgage bundles that get artificially high ratings and so can count fully to a bank's reserves, when in fact, they were worth ~10¢ on the dollar when the reckoning came.

Sadly, that really is how it works.  Except that it is actually 100% that is created out of thin air, not 90%.  But then the bank can borrow money (from depositors, other banks, or the fed) until they have sufficient reserves.

Check out this documentary called Money as Debt: http://www.youtube.com/watch?v=Dc3sKwwAaCU

It's a simplified explanation but that it how fractional reserve banking works. What do you think the word 'fractional' means? 

That's not how fractional reserve works at all...

I'd be interested in helping in this, i could be the graphic designer (make logos, advert banners, videos etc)

And as this forum has pretty much only computer nerds i think we would be the only un-hackable bank xD

Isn't this more or less what the global bitcoin stock exchange does?  glbse.com

Yes, loans, but I mean credits as in money created out of thin air. Today when banks create a loan they only need to have 10% of that loan as real assets to back it up. The rest, the 90%, is thin air. Bitcoins cannot be created out of thin air, only through massive comping resources.

If there's a difference in prices for a given good, borrowing in bitcoins could be favorable. If you have a $100 USD good and the seller accepts either $100 USD or 10 BTC when the exchange rate of BTC is 1BTC to 7 USD, you could have pressure to use BTC directly. If the seller feel bitcoins (deflationary) are going to hold their value or appreciate in value better than the inflationary USD, the seller may price their goods based on what they feel the currency they receive will be worth when they go to use it, that is, better than the current exchange rate.

Why? Interest and loans and a banking system existed under more or less fixed supply non-fiat money systems for hundreds of years.

What circumstances force people to borrow bitcoins instead of, for example, borrowing enough fiat currency to buy such bitcoins as they desire or need?

Doesn't it make more sense to borrow something else and buy bitcoins than to borrow bitcoins and use them to buy something else?

(Unless you expect the "something else" to appreciate in value faster than bitcoins.)

-MarkM-

The problem with bitcoins from a banking perspective is that it is difficult to create Bitcoin credits. With ordinary money creating credits is not only easy, it's a must.

Pixie, I think your idea of a depositor owned bank is the only way.  That is why I don't like to use the word bank to begin with. What I am really looking to create is more like a collection of one-off Bitcoin investment trusts or venture capital funds depending on the structure of the loan.  Really all the business itself would do is help to facilitate the transactions.  Such services could include connecting investors with borrowers, bookkeeping, evaluating creditworthiness, standardizing contracts, and legal services, etc.  For these services, the Bitbank would charge fees.  These fees then flow back to the member's of the Bitbank community in the same way a thrift works. This not only captures the spirit of community lending and investment, but ensures that their is no conflict of interest between those running the bank and the "depositors", because the two are one-in-the-same.  Again, I'd like to work with anyone to help set this up. Is there a good way of getting in touch via email?

Ah, yes the bank can demand that the bitcoins their customers have saved will be frozen for a year for example in order to give interest. But even then customers could demand all their bitcoins all at once which would cause a run on the bank.

The deflation rate of bitcoins may not be a problem on a second thought, because when the bank lends out bitcoins it expects the customer to also pay back the loan in bitcoins (or the equivalent value). But as you said, a borrower would also take into account the deflation rate of the bitcoins, and that may make the customers reluctant to borrow money from the bank.

You avoid runs completely if accounts are not on demand accounts. Mainstream banks used to do that with time deposits that paid interest and demand accounts that were free or cost a small fee. No reason a bitcoin bank can't do the same.

On the other hand a bitcoin bank would have a tough time making sense. Bitcoins will always increase in value so a business borrowing bitcoin from a bank would have to estimate that increase and add it to the cost of money when creating its business plan. It just doesn't make sense to borrow in bitcoins unless there is absolutely no alternative.

This is unfortunate because the people holding wealth are not always the people with the great business ideas. If you don't have a mechanism in place to utilize the wealth to create business you are running at a much lower efficiency. This is why I've come to believe bitcoin will be a great store of wealth but never a unit of account (for loans in this case.)

The problem with a Bitcoin bank is that the bank would have to lend out their customers' bitcoins to other customers, because in contrast to ordinary money, bitcoins cannot be created out of thin air, plus bitcoins are inherently deflationary so for the bank to buy bitcoins just to lend out would require huge interest rates in order to become profitable. Also, while this has worked for ordinary banks, people today would perhaps demand that there can be no run on a bank dealing with digital currencies, i.e. that the bank is able to pay back all their customers' money if they all should demand it all at once.

As stated earlier, I'm seriously thinking and exploring the idea... As a business man, however the first thing is to have a concrete business plan.

As such that is what I'm doing with now, trying to balance the potential books, how much investment, how to generate profits, share-holders or not?, advantage to users, etc.

Ironically given the current state of main economy banks, banking is all about trust... And that is a hard thing to get, for a bank to succeed, at the beginning it has to inspire confidence that it can keep you money safe and knows how to grew it (for interest and share-holders).

One possibility I've considered is to follow the model of the co-operative banks (AKA building societies) in the UK. On these there are no share-holders or owners except the customers. Your deposit with the bank, entitles you to a dividend each years based on the profits made.

Essentially you are entering into a contract with a loan and with a thorough screening process you could have enough information to go after the person in court fairly easily (assuming they were in your country). The fact that the contract is in bitcoins doesn't matter, as a court would rule on any sort of contract, whether someone promised to pay in Euros or gold or chicken, so long as you could prove that the value of the dispute is greater than $20 (in the US, at least 7th Amendment).

I think the concept of a bank is a fairly reasonable one. Individuals deposit their BTC in a "wallet" account setup through the bank site. Loans come from individuals looking to purchase mining hardware and present a proposal of what they need, the cost, the estimated Mhashes, current mining group and number of hours per day the rig would run along with identification information, passport, driver's license, ss card, proof of income, record of any collateral, btc and otherwise. Based on this, the current and future estimated difficulty and exchange rate, an interest rate and repayment plan would be devised that allows for a generous margin for both profit and potential risk. Depositors have basically invested their money in future mining expeditions and the bank profits by assuming the risk and collecting extra overhead as a service fee.

From a risk perspective, it would be best to initially limit investors deposits to only pay interest if they were invested in a CD-type format, for a period of 3-months, 6-months, 1 year etc with those withdrawing early receiving a substantial reduction in paid interest. Once the bank has a substantial amount of guaranteed capital, faith in the bank would be increased and it could eventually offer interest on regular "checking" accounts based on average daily balance. A limit to account size could be put in place to ensure no single investor could create a bank run. Other restrictions, such as limiting the number of new accounts offered in the event of low loan demand could be established. Interest paid can be adjusted based on exchange rates and difficulty values.

I think it's a fantastic idea. The bank itself would need a fairly substantial capital backing when it first opens, in BTC and probably a "real" currency like USD. I'm very interested in this and if anyone has the programming skills to create such a thing, I'd be happy to pay you, in American greenbacks.

It could be a nice idea offer something like 3.9% APR current accounts and offer loans and such quite like a normal bank but you'd have to have contracts so that people HAD to pay for it and they should upload photo ID like a passport so you can prove it in court etc